DCF Implied share price vs current price
doing a dcf valuation for dave and busters, and due to some major changes in their business model & rebranding plans post covid, their financials (notably total sales) have been at much higher figures than they have been historically. obviously this led to some optimistic growth projections, which is what i’m guessing led to a pretty unreasonable EV. i’m having trouble adjusting my model for a more accurate valuation. current price is around $40, and my implied values are at 120, 90 for the perpetuity method and exit ebitda method respectively.
more specifically, i’m having trouble justifying changing my assumptions so that projections are less optimistic. i feel like i’ve done common practice methods (at least at the undergrad prospect level) of projecting my financials, and having difficulties on navigating how to adjust my model and justifying said changes.
u can factor in historical growth rates w/ current and also lower your terminal growth rate w that and see where that leads you. just ssearching up davenbusters it looks like a large part of their growth was due to an acquisition and you might be assuming growth rate based on financials pre and post acquisition. you can separate out the dave n busters business and whatever business they acquired into two diff revenue streams and get to a more organic growth rate for the combined company.
you might also want to not dox yourself with the picture and username
thanks for the reply + advice. quick question though:
i understand many people tend to set the terminal growth rate as the annual gdp growth rate ~2-3% and that is what i did. how would i justifying drastically reducing this rate? what sources can i refer to when reducing this growth rate to a certain value?
you wouldn't have to drastically reduce- small terminal growth rate changes oftentimes will affect TV alot. a few justifications are market saturation, inability for the company to expand within their industry and trailing performance compared to peers. you can also calc TV with the GGM variation formula and see if those values are wildly diff, use the more conservative one. going out now but happy to take a look later if you want to dm
unfortunately even dropping the terminal growth rate to 0 still led to over a 100% upside in implied share price… used both ggm and exit ebitda and seems the latter is more conservative, but still looking at 125% upside. would love for you to maybe take a look tomorrow, definitely don’t wanna bother u out tonight and i’m getting a headache over it as well. not too sure with the wso ui and couldn’t find a dm option. wasn’t sure how to post anon so my profile should be visible. pls lmk on how to contact u 👍
Means you fucked up your WACC or FCF build-up.
Second this.
Your WACC is probably too low.
Check the implied ROIC on forecasted years and that it isn’t absurdly high, adjust capital intensity to reflect increasing competition etc.
Margin assumptions shouldn’t trend towards an unreasonable number either.
I generally do a 30 year DCF so I don’t have to mess around with the TGR, if I need to do a DCF that is
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